The S&P 500’s New High
Posted by Eddy Elfenbein on February 25th, 2014 at 11:01 am

I neglected to mention this yesterday but the S&P 500 broke out to a new all-time high. At its peak, the index reached 1,858.71.

Alas, it was not to stay. There was a late-day sell-off yesterday and the selling continued into this morning. We’ve recovered a bit and still have a good shot of closing above 1,848.38, which is the all-time closing high from January 15.

We’re coming up on the fifth anniversary of this bull market. The intra-day low of 666.79 came on March 6, 2009 (a Friday). The lowest close came the following Monday, March 9, when the S&P 500 ended the day at 676.53.

Preview of Buffett’s Shareholder Letter
Posted by Eddy Elfenbein on February 25th, 2014 at 10:55 am

CNN/Money has an exclusive excerpt from this year’s shareholder letter from Warren Buffett. This letter is eagerly awaited each year by investors. It always contains fascinating nuggets of investing wisdom.

In this except, Buffett lists some important fundamentals of investing:

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

For anyone looking to learn more about investing, I recommend checking out Buffett’s shareholder letters. You can find a collection here.

How to Hedge Our Buy List
Posted by Eddy Elfenbein on February 25th, 2014 at 10:49 am

David Pinsen has an interesting post at Seeking Alpha on how investors can hedge our Buy List. According to David our “portfolio has a negative hedging cost, meaning you would effectively be getting paid to hedge.”

I want to be clear that the expected return figures are his not mine. Nevertheless, David writes:

(F)or an investor who is only willing to risk a 10% decline, features a lower potential return, as you might expect: 6.87% over six months. That potential return is what the portfolio will return if each of its underlying securities achieves its expected return. But in the worst-case scenario — if every one of these securities went to zero before their hedges expired — the investor’s downside would be strictly limited to a decline of 9.81%.

Morning News: February 25, 2014
Posted by Eddy Elfenbein on February 25th, 2014 at 6:58 am

Rate Hike in Second Quarter 2015 ‘Not Unreasonable’ – Bank of England’s McCafferty

India to Block U.S. Trade Probes, Ready for Fight at WTO

Foreign Trade Drives Fourth Quarter German Growth as Domestic Demand Disappoints

Yuan Drops Most Since 2010 on Speculation PBOC Wants Volatility

China’s Twitter-like Sina Weibo Concedes Slowing Growth

LinkedIn to Expand in China, Goals Are ‘Aligned’ With Government’s

Top Bitcoin Exchange MtGox Goes Offline

Mark Zuckerberg Says WhatsApp Worth More Than $19 Billion

Facebook’s WhatsApp Adding Voice Calls

Icahn Targets Silicon Valley Directors’ Club

BASF Sees 2014 Earnings Gain as Quarterly Profits Rise

Men’s Wearhouse Raises Bid for Rival, Rips Bauer Deal

Target Push Into Canada Stumbles

Jeff Carter: ICE Chief Takes Lead On Market Reform

Jeff Miller: Weighing The Week Ahead: Does Weakness In Housing Threaten The Economy And Stocks?

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Morning News: February 24, 2014
Posted by Eddy Elfenbein on February 24th, 2014 at 6:43 am

Draghi Says ECB Prepared to Add Stimulus If Deflation Risks Rise

Emerging Stocks Drop as China Growth Concern; Ukraine Bonds Jump

Greece to Resume Talks With Bailout Inspectors on Monday

Can The Fed Stop The Next Recession? Business Can’t Bank On It

Netflix to Pay Comcast for Smoother Streaming

HSBC Profits Tick Higher in 2013 Helped by Cost Cuts

Keystone Review Goes to PSC Faulted Over Campaign Cash

China’s Sina Plans U.S. IPO for Weibo

Dixons Discusses Possible Merger With Carphone Warehouse

Mt Gox Resigns From Bitcoin Foundation

Will Betting Bitcoins Ever Happen in Las Vegas?

Yahoo Aims to More Deftly Blend Ads With Content

Woes of Megacity Driving Signal Dawn of ‘Peak Car’ Era

John Hempton: The Really Strange Comcast-Netflix Deal

Cullen Roche: Can We All Agree to Stop Comparing Everything to the S&P 500?

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“The Lady And The Stock Exchange”
Posted by Eddy Elfenbein on February 21st, 2014 at 11:55 pm

CWS Market Review – February 21, 2014
Posted by Eddy Elfenbein on February 21st, 2014 at 7:18 am

“Someone will always be getting richer faster than you. This is not a tragedy.” – Charlie Munger

Frankly, there wasn’t much important news on Wall Street this week. The markets were closed on Monday for Presidents’ Day, and earnings season is just about over.

But there’s a lurking danger whenever there’s a dearth of news. Traders don’t like a news vacuum, and that creates an environment where routine events are greatly hyped beyond their true importance. Traders need something to trade on, and if someone doesn’t give it to them, they’ll invent it. It’s either that, or watch curling.

What we saw this week was that everyone, it seemed, had an opinion on a series of mega-deals. Last week, Comcast said it’s hooking up with Time Warner Cable. Later we heard that Apple’s M&A people were talking with Tesla (dream on!). Then came the blockbuster deal: Facebook is buying WhatsApp for $16.4 billion (possibly as much as $19 billion if you include restricted stock).

WhatsApp has a grand total of 55 employees, and last year they brought in $20 million in revenue (not profits—revenue). Five years ago, WhatsApp’s CEO, Jan Koum, applied for a job at Facebook. He was rejected. Now he’s a billionaire several times over.

Is all this crazy? In my opinion, probably, but it’s added some mid-winter excitement, that’s for sure. After the deal was announced, Facebook’s stock opened lower, then rallied throughout the day, and ultimately closed higher by more than 2%.

Now some professional scolders are saying that these crazy deals are the signs of a frothy bull market. While some of these deals are hard to justify, I don’t think the entire market can be judged a bubble.

Sure, there are some trouble spots. The Q4 earnings season was decent, but it was hardly spectacular. The crummy weather has hurt a lot of retailers. Even Walmart, the big daddy of retailers, missed earnings by 25 cents per share. You don’t see that a lot. Plus, there are still troubles in many emerging markets. The news out of China is disappointing, and of course, the violence in Ukraine is heart-wrenching.

In this week’s CWS Market Review, I want to cover some of the overlooked news. The minutes from January’s Fed meeting came out this week, and if you look past the talking heads, it’s clear they’re talking about ditching the Evans Rule. That’s a big deal, and I’ll explain what that means in a bit.

We also had an outstanding earnings reports from DirecTV. The satellite-TV stock crushed estimates by 23 cents per share. The shares raced 3% higher on Thursday to hit a new all-time high. I have my new Buy Below for you (you can see our complete Buy List here. We also got good earnings reports from Medtronic and Express Scripts. I’ll also preview next week’s earnings report from Ross Stores. But first, let’s take a closer look at what’s on the Fed’s mind.

The Debate Raging within the Federal Reserve

There’s a debate raging within the Federal Reserve as to what to do about the “Evans Rule.” This was guidance adopted by the Fed, at the urging of Chicago Fed President Charles Evans, as to what specific metric would cause the Fed to raise short-term interest rates. The Fed said that it would use an unemployment rate of 6.5%. Previous Fed Chairman Ben Bernanke was careful to warn that this was a threshold and not a trigger.

The problem is that unemployment has already declined to 6.6%, and no one’s even close to raising interest rates. Most FOMC members don’t see a rate increase happening until 2015 or 2016. There are even some folks who say that low rates are here to stay and the Fed’s use of Quantitative Easing will become its primary tool to fine-tune the economy. That’s probably too extreme, but it’s being talked about.

The minutes released this week covered the Fed’s January meeting. Interestingly, the Fed`s members were surprised at the economy’s strength. That obviously contributed to the decision to gradually pare back their massive bond-buying program. But what’s interesting is that the central bank is showing no signs of backing away from taper plans, even though the last two jobs reports weren’t so hot.

Strangely, the Fed is as undecided about when to raise short-term rates as it is stubborn about tapering. In fact, the Fed may even back away from using a specific number, like Evans had suggested, and fall back on using garbled econo-speak. The plus is that this doesn’t lead the markets to false expectations. Some FOMC members favor this direction but it adds a layer of opaqueness to the Fed’s deliberations.

The Fed may elect to lower the threshold. Narayana Kocherlakota, the president of the Minneapolis Fed, wants to go down to 5.5%. I think some voting members want to get rid of a precise number altogether. As I said, markets will find something to fret about. Of course, all of this is complicated by the Fed`s having a new boss in Janet Yellen. The Fed’s next meeting, and the first one under Yellen, will be on March 18 and 19.

What this means for investors: The Fed is still clearly on the side of investors. Quantitative Easing is with us, and will be for several more months. The pace of stimulus, however, will gradually decline. The curveball about QE is that it impacts the long end of the yield curve, while traditional Fed stimulus is at the short end. Higher long-term rates could impede sectors like housing, but I doubt we’ll see much impact, although we’ve seen mortgage financing take a hit. The simple fact is that housing inventory is lean, and the market needs more homes. Bad weather may delay that fact, but it won’t change it.

This is good news for the economy and for the stock market in general. I think it’s very likely that 2014 will be one of the strongest years for economic growth in a long time. I won’t go so far as predicting a bond market sell-off, but I do think the long end of the curve is a bad place for investors. The yields are just too measly, and the math is squarely on the side of stock “longs.” Continue to focus your portfolio on high-quality stocks such as our Buy List. If the Evans Rule is altered or dropped, it could propel the market much higher. Now let’s look at some of our Buy List earnings from this week.

Medtronic Is a Buy up to $61 per Share

On Tuesday, Medtronic ($MDT) reported fiscal Q3 earnings of 91 cents per share, which matched expectations. In last week’s CWS Market Review, I said that was my estimate as well. Quarterly revenues rose by 3.4% to $4.16 billion, which was $10 million more than forecast. Medtronic is one of those stable-growth companies. It’s not blistering growth, but it’s steady.

Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. Note that their fiscal year ends in April. For the first three quarters of this fiscal year, MDT earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 – $1.13 per share. Wall Street had been expecting $1.12 per share.

Overall, this was a good quarter for Medtronic. Sales of their diabetes products rose by 16%. The medical-devices company was particularly strong in emerging markets, where sales rose by 10%. MDT expects to do even better in EM in the coming quarters.

Even though these results were almost exactly what I had expected, the stock dropped nearly 3% after the report came out, then rallied the rest of the week. By the closing bell on Thursday, the shares were 40 cents higher than they were before the report. Naturally, this makes no sense, but it’s what markets do (remember what I had said about Facebook earlier). In any event, Medtronic remains a high-quality buy up to $61 per share.

DirecTV Smashes Wall Street’s Earnings Estimate

In last week’s CWS Market Review, I said that Wall Street’s consensus was too low on DirecTV’s ($DTV) earnings. I was right about that. On Thursday, the satellite-TV company reported Q4 earnings of $1.53 per share, which was 23 cents better than expectations.

This was an outstanding quarter for DTV. The shares gapped up 3% on Thursday to a new all-time high. Latin America continues to be a growth powerhouse. Last year, revenues there were up 10%, and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, less than clear in some parts of Latam. The company plans to add another one million new Latin American subscribers this year.

The U.S. wasn’t so bad either. DTV added 93,000 new American subscribers. Analysts were expecting an increase of just 21,000. DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few companies that do it right. They actually reduce their overall share count. Imagine that! Over the last seven years, DTV’s share count is down by 57%. Working out the math, a $3.5 billion buyback is roughly 9% of DTV’s market cap. I’m raising our Buy Below on DirecTV to $80 per share.

Express Scripts Is a Buy up to $83 per Share

On Thursday, Express Scripts ($ESRX) reported that it earned $1.12 per share for the fourth quarter. That also hit expectations on the nose. This really wasn’t a major surprise, since in October, the pharmacy-benefit manager told us to expect Q4 earnings to range between $1.09 and $1.13 per share.

I was especially curious to hear what ESRX had to say in the way of guidance. For all of 2014, they see earnings ranging between $4.88 and $5 per share. Those are very good numbers, and it gives the stock a reasonable valuation. The Street’s consensus had been for $4.93 per share. In a press release, Express Scripts said it’s “targeting annual earnings per share growth of 10 per cent to 20 per cent for the next several years.”

Previously, I said I wanted to see the earnings report before I decided to alter our Buy Below price. Now I see it, and I’m pleased with what I see. This week, I’m raising our Buy Below on ESRX to $83 per share.

Preview of Ross Stores, and a Few New Buy Below Prices

We have one earnings report due next week, from Ross Stores ($ROST). I like Ross a lot; it’s one of my favorite deep-discount retailers. That’s why I was so surprised when they gave a dour outlook for Q4 earnings. Ross said to expect fourth-quarter earnings (their Q4 covers November-December-January) to range between 97 cents and $1.01 per share. Wall Street had been expecting $1.09 per share.

Wall Street didn’t like that at all. ROST dropped from a high of $82 just prior to Thanksgiving to less than $66 in early February. The question is, how much of this is due to Ross, and how much is due to a lousy environment for retail? Like I said, even Walmart is having trouble. It appears that lousy weather has hurt shopping across broad stretches of the country.

Ross is due to report earnings next Thursday, February 27. I think investors are looking past the Q4 numbers and want to see any guidance for 2014. I’m inclined to think that ROST’s problems are sector-related and not specific to them. Ross Stores continues to be a good buy up to $74 per share.

Before I go, I want to make a few Buy Below adjustments. Stryker ($SYK) continues to do very well for us. A few weeks ago, the company beat earnings and guided higher. The stock hit another 52-week high this week. Remember that after the earnings report, the stock fell, which should tell you all you need to know about the market’s short-term judgment. This week, I’m raising our Buy Below on Stryker to $87 per share.

Two weeks ago, I lowered the Buy Below on Fiserv ($FISV) after the stock missed earnings by a penny. I’ve mulled this over, and I think I acted too rashly. FISV is a dependable stock, and it’s rallied for six of the last seven days. I’m lifting my Buy Below on Fiserv to $60 per share.

I’m pleased to see CR Bard ($BCR) rebound so well. Since February 3, shares of Bard have rallied 12%, and the stock just hit a brand-new 52-week high. Look for another dividend increase this spring. I’m raising our Buy Below on BCR to $144 per share.

Finally, I’m keeping our Buy Below for Cognizant Technology ($CTSH) at $104 per share, but remember that it’s going to split 2 for 1 in early March. Our Buy Below will split along with it. Until then, CTSH remains a very good buy up to $104 per share, and $52 per share post-split.

That’s all for now. Next week is the final trading week of February. On Tuesday, the Consumer Confidence report comes out. Thursday is the Durable-Goods report, and after the bell, we’ll hear Q4 earnings results from Ross Stores. On Friday, the government will revise the Q4 GDP report. The initial report said the economy grew by 3.2% during the last three months of 2013. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: February 21, 2014
Posted by Eddy Elfenbein on February 21st, 2014 at 6:57 am

G20: Pressure Mounts on Delegates to Agree to Meaningful Global Strategies

January Retail Sales in UK Fall Back After Exceptional December

Ukraine Credit Rating Cut by S&P as Violence Continues

Yanukovych Offers Snap Presidential Vote to End Crisis

Royal Bank of Scotland to Slash Headcount by Up to a Quarter in Revamp

Consumer Prices Edge Up, Moving Closer to Fed Target

Study Finds Greater Income Inequality in Nation’s Thriving Cities

Firm Stops Giving High-Speed Traders Direct Access to Releases

Founders of an Anti-Facebook Are Won Over

Hewlett-Packard Sales, Profit Exceed Estimates on Server Demand

Groupon Shares Drop as Forecast Trails Estimates on Expenses

Chevron’s Free Pizza Offer Only Feeds Public’s Distrust

Does Bitcoin Really Need the Winkdex?

Joshua Brown: Truer Words Were Never Spoken

Epicurean Dealmaker: Venn Diagram

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A Zero-Commission Brokerage?
Posted by Eddy Elfenbein on February 20th, 2014 at 3:19 pm

The Five-Year Itch
Posted by Eddy Elfenbein on February 20th, 2014 at 10:22 am

I caution against reading too much into this, but two recent bull markets have had five-year lifespans.

By closing low to closing high:

Low: August 12, 1982
High: August 25, 1987

Low: October 9, 2002
High October 9, 2007

Low: March 9, 2009
High: ?????